Accounts

Question 1

What is the double entry bookkeeping rule?

Question 2

What is client money and where does it belong?

Answer 2

Client money belongs to the client and should be placed in the client account.

Common examples of client money
- Money sent before a transactions is billed - on account of costs,
- deposit money received and held by you as an agent
- money sent before a bill has been sent

Question 3

When is a disbursement client money?

Answer 3

A disbursement is client money when
- money has been sent for disbursement (i.e searches) which have not yet been incurred - client money

A disbursement is non client money when the disbursement has been incurred and paid by the firm on the behalf of the client.

Once a bill has been sent, or the law firm has paid for the disbursement - it becomes non client money

Question 4

What is non client money?

Answer 4

Anything that is not client money - belongs to the office or business account

Question 5

What are the rules surrounding client money?

Answer 5

You ensure that client money is paid promptly into a client account.

Must be available on demand, otherwise the alternative must be agreed in writing by client or third party who the money is kept for.

Must be returned to client if there is no proper reason to hold on to them - i.e return client money at the end of the transaction

Client account should be related to the transaction - not to be used as a bank account.

Can only withdraw client money for the purpose they are being held or following receipt of instruction from the client.

All withdrawal must be supervised and authorised.

Only withdraw from client account for that client - if you have specific funds for that client.

Keep client money separate from non client money.

Send bill first, before withdrawing client money.

Correct any breaches of SRA rules PROMPTLY

Question 6

Rules on client accounting systems

Answer 6

You must keep accurate, current and chronological account records for each client

You must obtain bank statement for the client account at least every 5 weeks

At least every 5 weeks, you should compare the client account with the cash sheet - any differences should be promptly investigated

Keep a record of all invoices/bills sent out

Question 7

Can you charge interest for holding clients money?

Answer 7

Yes but you must remember that it money should be only held in relation to the legal services you are providing to the client - should not be used as a bank account

Question 8

When do you record a credit entry and when do you record a debit entry?

Answer 8

Credit entry: money coming into the bank account
Debit entry: money coming out of the bank account or creating a debt

Question 9

What is the client ledger?

Answer 9

There’s two sides.

1. Client ledger client account - used to record transaction of client money in the client account
2. Client ledger business account - used to record transaction of non client money in the business account

Question 10

What is the cash sheet for client account?

Answer 10

Recording money paid into or taken out of the client account

Question 11

What is the cash sheet for the business account?

Answer 11

Recording money paid into or taken out of the business account

Question 12

What is the profit costs ledger?

Answer 12

Used to record bills of costs issued to clients and any reductions to those costs

Question 13

What is the VAT ledger?

Answer 13

Used to record VAT on bills and disbursements

Question 14

When will the firm need to operate and create a client account?

Answer 14

All firms except for

1. Firms that have chosen to operate with a third party business separate to the firm.
2. A. The only money they receive is for the bills and disbursements prior to the delivery of the bill and,
   B. The firm does not operate for any other purpose and
   C. The firm has told the clients in advance where and how their money will be held

E.g, Criminal firm only receives money from legal aid agency.

Question 15

What are the exceptions of when client money does not need to be paid into the firms client account?

Answer 15

1. Where its money that is held by a solicitor as a trustee or office holder - they can follow their role requirement instead where a conflict arises.

2, payments from legal aid agency for the firms costs can go straight to the business account

3. Advance written agreement with client for alternative arrangement

Question 16

What are the requirements for a client account?

Answer 16

Must be in the firms name, labelled “client”. Must be an account in a bank or building society in England and Wales

Question 17

When can you withdraw client money?

Answer 17

1. For the purposes it’s being held
2. Following the client’s instructions or relevant third party
3. SRA authorisation

Question 18

How should firms deal with interest?

Answer 18

Firms should pay its clients a fair sum of lieu in interests, subject to any de minimis provision ( if is under the minimum threshold, they are not required to pay the client interest) or alternate arrangements agreed in writing.

This means, when a large amount of client money is held for a long time, you must pay the client either the actual interest accrued or pay them money instead of interest. Where a firm hold a small amount of client money over a short period of time it is fair not to pay the client the interest.

Interest is payable as a business expense

Question 19

How do you calculate how much money is owed by a firm to HMRC each quarter?

Answer 19

Output tax (VAT you charge on your services) - Input tax (VAT you pay on costs/expenses) / 4 = money owed to HMRC

Question 20

What are the principle and agency methods? And when do you used them?

Answer 20

Agency - when the client name is on the invoice. Payments can be made from the client accounts if sufficent funds are available or business funds if they’re not. You wouldn’t need to make VAT entries as laibilty for tax is with the client.

Principle - when the firms name is on the invoice. Payments must always be made from the business account. Firm pays first and the recharge/gets reimbursed by the client. Firm is responsible for pay VAT, but will get reimbursed.

Question 21

Entries - client money received (on account of costs)

Answer 21

Credit client ledger client account
Debit cash sheet client account

Question 22

Entries - Client money paid out

Answer 22

Debit client ledger client account for that client
Credit cash sheet client account

Question 23

Entries - Non-client money received (e.g. money received to reimburse you for a paid disbursement)

Answer 23

Credit client ledger business account for that client
Debit cash sheet business account

Question 24

Entries - Non-client money paid out (e.g. firm pays search fees out of non-client money because there is insufficient money in client account)

Answer 24

Debit client ledger business account for that client
Credit cash sheet business account

Question 25

Entries - Receipt of mixed money – splitting the cheque and paying client money into the client account and non-client money into the business account

Answer 25

Credit client ledger client account for that client
Debit cash sheet client account

Credit client ledger business account for that client
Debit cash sheet business account

Question 26

Entries - Transfer from client account to business account

Answer 26

Debit client ledger client account for that client
Credit cash sheet client account

Credit client ledger business account for that client
Debit cash sheet business account

Question 27

Entries - issuing a bill plus VAT

Answer 27

Debit client ledger business account for that client with the amount of the bill of costs (less VAT)
Credit profit costs with the amount of the bill of costs (less VAT)

Debit client ledger business account for that client with the amount of the VAT on the bill of costs
Credit VAT account with the amount of the VAT on the bill of costs

Question 28

Entries - writing off a bad debt

Answer 28

Credit client ledger business account (excluding VAT)
Debit bad and doubtful debts with the amount of the debt being written off

Credit client ledger business account for that client with the amount of VAT in respect of the unpaid debt
Debit VAT account with the amount of VAT in respect of the unpaid debt

Question 29

Rules on DEALING WITH OTHER MONEY BELONGING TO CLIENTS

Answer 29

If, when acting in a client’s matter, you operate a joint account (holding or receiving money jointly with the client or a third party), the only solicitors accounts rules which apply, are the ones to obtain a bank statement for the account at least every five weeks and to keep a record of all bills of costs you send out. The solicitors accounts rules on accountants’ reports and accounting records still also apply.

If, in the course of practice, you operate a client’s own account as signatory, the only solicitors accounts rules which apply, are the one to obtain a bank statement for the account at least every five weeks, the one to, at least every five weeks, reconcile the bank statement with the cash book balance and the client ledger total and promptly investigate and resolve any differences shown, and the one to keep a record of all bills of costs you send out. The solicitors accounts rules on accountants’ reports and accounting records still also apply.

A third party managed account can be used to receive and make payments for the client in respect of your legal and other regulated services to the client as long as you do not receive or hold the client’s money and the client is informed of and understands the arrangements relating to the third party managed account (in particular with regard to fees and who will pay them) and their right to terminate the agreement.
NB Rule 11.2: If a third party managed account is used, you must obtain regular statements from the provider of it and check these accurately reflect the transactions on the account.

Question 30

Rules on record keeping

Answer 30

Firms must keep accurate, contemporaneous and chronological accounting records, including client ledgers, a cash sheet, a profit costs ledger and a transfers journal.

Client ledgers must be identifiable as such and should include the name of the client and the legal matter involved. Receipts and payments of client money or business money must be recorded in the client or business columns, respectively.

Firms must obtain bank statements and conduct a bank reconciliation at least once every five weeks. The reconciliation statement must be signed off by a manager or the COFA of the firm once any differences have been investigated and resolved.

Firms that hold, receive or are responsible for client money must obtain an accountant’s report within six months of the end of the accounting period to which it relates. The primary purposes of the report are to check compliance with the Rules and to identify any risks to client money. There is no need to obtain a report if the client money held in the accounting period is only from the Legal Aid Agency, or if the amounts held fall below prescribed minimum thresholds.

The accountant must sign the report in the prescribed format. If they identify any serious breaches of the Rules and/or risks to client money, they will qualify the report. A firm must deliver a qualified accountant’s report to the SRA within six months of the end of the accounting period.

Accountants must be members of recognised professional bodies but can be disqualified by the SRA from preparing reports for firms if they have been found guilty of professional misconduct or if the SRA finds that they have failed to exercise due care and attention in preparing reports.

Firms must retain and store accounting records for six years.